is islamic finance a socially responsible finance? 2014: securities commission introduced sri sukuk...
TRANSCRIPT
Is Islamic Finance a Socially Responsible
Finance?
RAFE HANEEF
CEOCIMB Islamic
16 November 2016
Contents
Section 1
Integrating Islamic Finance and Sustainability
Section 2
SRI Sukuk
Case Study: Khazanah SRI Sukuk
3
Section 1
Integrating Islamic Finance and Sustainability
4
Islamic Finance and Impact on Sustainability
Businesses can impact the environment, communities & society
• Banks need to work closely with its business customers to understand and manage these issues
• These issues pose a risk to our clients’ businesses, and therefore to our business
• Need to manage potential negative impact to the environment, communities, reputation, and potential punitive measures, e.g. fines
Sustainability policy and framework
• Business customers within sensitive sectors must apply consistent standards of international good practice, going beyond international laws and agreements, e.g. chemicals, forestry, mining & metals, energy, freshwater , infrastructure, etc
Sustainability process implementation
• At outset of client relationship, check whether client is in compliance with
sustainability risk policy
• Implement monitoring process, similar to that of monitoring credit risk
• Support client to make necessary improvements to become compliant
Significant correlation between Islamic Finance and ESG philosophies
but current practices fall short of expectations
Integrating Islamic Finance and ESG
ESG refers to environmental, social and governance implications when extending financing
Environmental: climate change, pollution, protection of biodiversity and the protection of indigenous communities and endangered species;
Social: diversity, poverty, human rights, consumer protection, sin stock, animal welfare etc.;
Governance: corporate structure, employee welfare, executive compensation etc.
The UNPRI has issued a list of six principles as guidelines for investors/financiers to take into account in their investment/financing decision-making:
1. We will incorporate ESG issues into investment analysis and decision-making processes
2. We will be active owners and incorporate ESG issues into our ownership policies and practices
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest
4. We will promote acceptance and implementation of the Principles within the investment industry
5. We will work together to enhance our effectiveness in implementing the Principles
6. We will each report on our activities and progress towards implementing the Principles
Banks’ Integral Role and Ambit of Influence
6
IFIs
Adopting ESG Policies
Tighter global
regulation (EIA)
Customer awareness
Renewable energy
investments
Climate change
adaptation
Changing risk profiling
and assessment
NGOs
Increased consumer
awareness of sustainable
life-style, ethical finance,
environmentally
conscience consumerism,
sustainable capitalism
Mounting pressure on Governments
from international organizations and
NGOs to set targets and move towards
greener economies
Evolving
international
standards for risk
management that
incorporate E&S
risks (EPIII
launched in 2013)
CO2 emissions will
eventually be
priced (Guardian) Studies have shown that banks are
vital players in the climate change
adaptation and mitigation efforts,
particularly influencing SME
behaviour
Reducing global GHG
emissions necessitated the
need for infrastructure &
renewable energy project
which require large
investments
Independent organisations like
BankTrack are mounting pressure
on banks to improve their negative
E&S impact
There are a number of
organisations and NGOs
that work towards
creating a unified
approach to what has
become an area of huge
growth, including:
- UN Principles for
Responsible
Investment
- World Business Council
for Sustainable
Development
- UNEP Finance Initiative
- The World Bank’s IFC
- Global Reporting
Initiative
7
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100
En
vir
on
me
nta
l P
erf
orm
an
ce
In
de
x
(EP
I)
Regulatory Quality (RQ)
Regulator Quality & EPI for EPFI Countries
EPFI
Non-EPFI
Source: Sultan, H (2013): Sustainable lending in international banking markets
Influence the creation of
demand:
• Tax incentives for
companies who
measure their impact
• Reduced capital
requirements for FI that
take into account
environmental risk
• Mandatory reporting of
environmental footprint
(CO2, water, waste etc.)
Align with other global
practices and initiatives
(ESG, EP, SRI etc.)
Sharing of best practices
(e.g. EU legislation and
approach and China’s
greening of the financial
system initiatives)
A recent research concluded that correlation exists between the quality of regulation and environmental performance index of any country, resulting in, for example, higher adoption of EP
Regulators can assist managing perception of higher costs and risks linked with incorporating environmental aspects in financial decision making
Recently Malaysia saw the launch of two initiatives:
Securities Commission in issued framework for SRI Sukuk in August 2014
Bursa Malaysia has launched an ESG Index in December 2014
Regulators’ Role in Integrating Finance and ESG
8
2014: Securities Commission introduced SRI Sukuk framework to finance various sustainable
and responsible investment initiatives
2014: ESG index launched: FTSE4Good Bursa Malaysia Index, which selects from top 200
Malaysia stocks in the FTSE Bursa Malaysia EMAS Index
2015: Valuecap Sdn Bhd allocated RM1 billion to invest in companies that scored high on
ESG Index – the Malaysian ESG Opportunity Fund
2015: Bursa Malaysia launched Sustainability Framework and issued a Sustainable Reporting
Guide and Toolkit.
2015: EPF began investing in ESG principles, initially with fixed income instruments, and then
migrated the standards to other asset classes.
2015: KWAP moved to adopt responsible investing. ESG principles formulated & outsourced
ESG mandate to External Fund Managers and set up one internally-managed ESG mandate
2016: EPF Chairman announced EPF’s ESG investments are also aligned with its Shariah
strategies. It will eventually dispose of its stake in British American Tobacco. It also does not
invest in gambling, alcohol or alcohol-related businesses.
ESG Developments and Initiatives in Malaysia
9
Section 2
Socially Responsible Investing (SRI) Sukuk
Case Study: Khazanah SRI Sukuk
10
Malaysia Sustainable and Responsible Investment (SRI) Sukuk Framework launched 28 August 2014
Objective: Facilitate financing of sustainable and responsible investment initiatives
• Meet demand of retail and sophisticated investors for access to a wider range of investment products and facilitate greater participation in the sukuk market
• Growing concerns over environmental and social impact of business and greater demand for stronger governance and ethics from businesses
• Facilitate the creation of an eco-system conducive for SRI investors and issuers
• An extension of the existing sukuk framework; therefore all other requirements in the Guidelines on Sukuk continue to apply
Additional areas addressed in SRI sukuk framework
• Utilisation of proceeds
• Eligible SRI projects
• Disclosure requirement
• Appointment of independent expert
• Reporting requirement
Source: Securities Commission Malaysia
11
Projects that can be deemed an ‘Eligible SRI Project’
Natural Resources Renewable Energy / Energy Efficiency
Community and EconomicDevelopment
Waqf Property / Assets
Water infrastructure, treatment and recycling
New or existing renewable energy (solar, wind, hydro, biomass, geothermal and tidal)
Public hospital / medical services
Development of waqf properties / assets
Sustainable forestry or agriculture
Efficient power generation and transmission systems
Public educationalservices
Remediation and redevelopment of polluted or contaminated sites
Energy efficiency which results in reduction of greenhouse gas emissions or energy consumption per unit output
Community services
Biodiversity conservation Urban revitalisation
Sustainable land use Sustainable buildingprojects
Sustainable waste management
Affordable housing
Source: Securities Commission Malaysia
12
SRI Sukuk Disclosure Requirements
Prospectus for SRI sukuk must include:
• Details of the Eligible SRI project and, to the extent possible, impact objectives from the Eligible SRI project
• Statement that the issuer has complied with the relevant environmental, social and governance standards or recognised best practices relating to the Eligible SRI project.
• Independent expert must issue a report on the Eligible SRI project and such report must be included in in the prospectus
Annual reporting, via newsletters, website updates, annual report or any other communication channels, to sukukholders on the following:
• Original amount earmarked for the Eligible SRI project
• Amount utilised for the Eligible SRI project
• The unutilised amount and where such unutilised amount is placed or invested pending utilisation, and
• Where feasible and to the extent possible, the impact objectives from the Eligible SRI project
Source: Securities Commission Malaysia
13
ISSUER
OBLIGOR Khazanah Nasional Berhad (“Khazanah”)
Ihsan Sukuk Berhad (“Ihsan”), a special purpose vehicle initiated by Khazanah
PRINCIPAL ADVISER/ LEAD ARRANGER
CIMB Investment Bank Berhad (“CIMB”)
JOINT SHARIAH ADVISERS CIMB Islamic Bank Berhad and Amanie Advisors Sdn Bhd
FACILITYRM1.0 billion in nominal value Sukuk programme established under the “Sustainable andResponsible Investment Sukuk” framework (“Sukuk Programme”)
FACILITY TENURE
OFFERING SIZE TBD
Twenty five (25) years from the date of the first issuance
OFFERING TENURE
ISSUE PRICE 100%
Seven (7) years
PERIODIC DISTRIBUTION PAYMENT FREQUENCY
RATING Initial rating of AAA(s) by RAM Rating Services Berhad
Annual basis
ISLAMIC PRINCIPLE
USE OF PROCEEDSIhsan: To purchase the Sukuk InvestmentsKhazanah: To fund Yayasan AMIR’s Trust Schools Programme for 2015
Wakalah Bi Al-Istithmar
GOVERNING LAW Laws of Malaysia
Case Study: Khazanah SRI SukukSummary Terms and Conditions of the Offering
14
KEY PERFORMANCE INDICATORS (“KPIs”)
(i) A minimum of twenty (20) schools are selected under Yayasan AMIR’s TrustSchools Programme for a five (5)-year intervention period (the “5-YearIntervention Period”) during the term of the First Sukuk Ihsan (“IdentifiedSchools”);
(ii) At least fifty per cent. (50%) of the teachers of the Identified Schools are ratedat the Establishing level or above in their observations after the end of theirrespective Identified Schools’ 5-Year Intervention Period; and
(iii) At least fifty per cent. (50%) of the senior leadership of the Identified Schoolsare rated at the Establishing level or above in their observations after the endof their respective Identified Schools’ 5-Year Intervention Period.
SUKUKHOLDERS OPTION TO WAIVE
The Sukukholders may, at their option, waive their rights, benefits andentitlements to the Periodic Distributions (including accrued but unpaid PeriodicDistribution Amount (if any)) and the nominal amount payable under the Sukuk tobe issued pursuant to the Sukuk Programme (“Sukuk Ihsan”) (in whole and not inpart), by selling to Khazanah their Sukukholdings in the Sukuk Ihsan for a nominalconsideration of RM1.00 (“Option to Waive”) in accordance with the terms of theSukuk Ihsan.
Case Study: Khazanah SRI SukukSummary Terms and Conditions of the Offering (Cont’d)
Malaysia Deal of the Year (2016)
Deal of The Year (2016)
Best Islamic Finance Advocacy Award 2015
Most Outstanding Islamic Finance Product 2015
Social Impact Deal of the year (2016)
Most Innovative Deal of the Year (2016)
15
Khazanah(Investment
Wakeel/Obligor)
Sukukholders
Sukuk Investments(Tangible Assets & Commodity
Murabahah Investment)
Issue Sukuk Ihsan
Sukuk ProceedsAppoint Khazanah asInvestment Wakeel to invest the
Sukuk Proceeds
2. Invest into & manage Sukuk Investment
3. Periodic Distributions
4. Purchase Undertaking(Exercise Price)
Period Distributions
CIMB Islamic Trustee Berhad(Sukuk Trustee)
4. Dissolution Distribution Amount
Appoint Ihsan as Wakeel
2
4 4
1a
1c
1d
3
3
1b
Ihsan(Wakeel/
Issuer)
Case Study: Khazanah SRI Sukuk Structure
16
Should we not move beyond what is legal to what is right?
BENEFICIAL
(TAYYAB)
LEGAL
(HALAL)
Award-winning Islamic finance franchise
The World Islamic Capital Markets Excellence Award (2007)
Best Innovation in Islamic Finance (2015)
Best Islamic Bank in Asia (2005, 2006-2013)
Best Islamic Bank in Malaysia (2012, 2013)
Best Sukuk House (2008) Islamic Finance Deal of the Year
(2005, 2011) Best Sukuk Deal (2009, 2010) Best Provider of Islamic Financial
Services in Malaysia (2004) Best Domestic Market Sukuk House
(2003) Most Innovative Deal (2013) Best Project Finance Deal (2013)
Islamic Fund House of the Year (Malaysia) (2007, 2008)
Best DCM House Malaysia (2014-2015)
Best Investment Grade Bond (2015) Best Islamic Financing (2006-2008,
2010, 2011) Best Islamic Financing Deal (2008,
2012, 2014) Best Islamic Finance House (2006-
2009, 2011, 2012, 2014) Best Project Financing (2014)
Asian Banker Achievement Award for Islamic Finance (2009, 2010)
Sukuk House of the Year, Asia Pacific (2012-2016) Sukuk House of the Year, Malaysia (2014-2016) Best Islamic Investment Bank /House in Asia Pacific
(2010, 2013, 2015) Sukuk House of the Year, Indonesia (2016) Best Sovereign Sukuk Deal (2014, 2015, 2016) Best Islamic Investment Bank in Malaysia (2015) Best Sovereign Sukuk – Highly Commended (2016) Best Deals in Hong Kong, Indonesia, Japan, Malaysia
and United Kingdom (2015) Best Equity-Linked Deal (2015) Best Sukuk (2016) Best Corporate Sukuk Deal (2012, 2013, 2015) Islamic Deal of the Year (2014) Islamic Deal of the Year (2012, 2013) Best Quasi-Sovereign Sukuk (2015, 2016) Best New Sukuk (2015) Best Sukuk for Social Good (2015) Best REIT Sukuk (2015) Best Corporate Hybrid Sukuk/Best Local Currency
Sukuk (2015, 2016) Best Corporate Hybrid Sukuk – Highly Commended
(2015) Best Islamic Project Finance Deal (Malaysia) (2009,
2011, 2013, 2015) Best Islamic Deal, Malaysia Deal (2012-2014) Most Innovative Deal / Best Islamic Local Currency
Deal (2012-2014) Best Islamic Equity Linked Deal (2014) Islamic Bank of the Year (2010, 2012, 2013) Best Islamic Bank of the Year Country Awards (2010,
2012, 2013) Best Quasi-Sovereign Sukuk/Best Islamic Equity-
Linked Deal (2013) Best Islamic Deal, Bahrain (2013) Best Islamic Investment Bank in Asia (2012) Best Islamic Restructuring Deal (2012) Highly Commended Islamic Finance Deal - Malaysia
Deal (2010, 2011)
Best Islamic Bank in Malaysia (2007, 2008, 2010, 2013, 2014)
Deal of the Year (2014, 2015) Malaysia Deal of the Year (2009, 2012-
2015) Most Innovative Deal of the Year
(2013, 2015) Social Impact Deal of the Year
(2014, 2015) Perpetual Deal of the Year (2013, 2015) Infrastructure Deal of the Year
(2009, 2015) Project Finance Deal of the Year (2009, 2015) Murabahah Deal of the Year (2014) Sovereign Deal of the Year (2009-2011,
2014) Indonesia Deal of the Year (2010, 2014) UK Deal of the Year (2014) Emerging Asia Deal of the Year (2014) Sukuk Deal of the Year (2014) Real Estate Deal of the Year (2014) Hybrid Deal of the Year (2014) Best Overall Islamic Bank 1st Place (2009,
2010), 2nd Place (2008), 3rd Place (2007) Most Innovative Islamic Bank (2009-
2011) Musharakah Deal of the Year (2013) Tawarruq Deal of the Year (2010) Ijarah Deal of the Year (2010, 2011) Cross-Border Deal of the Year (2010-
2012) Turkey Deal of the Year (2015)
Best Islamic Bank in Malaysia and Asia (2008-2010,2015)
Best Sukuk Bank (2010, 2015)
Most Innovative Deal/Innovative Islamic Deal of the Year in South-East Asia (2010, 2011, 2013-2015)
Best Deal of the Year in Southeast Asia (2015)
Best Islamic REIT Deal of the Year in Southeast Asia (2014)
Special Marquee Awards: Best Islamic Finance Bank in South-East Asia (2010, 2012-2014)
Best Islamic Finance Deal of the Year in South-East Asia (2007-2013)
Best Islamic Finance House (Malaysia) (2008-2010, 2014)
Islamic Finance Deal of the Year (2009, 2010, 2013-2015)
Inaugural Lead Manager Award for Foreign Currency Programme(2015)
World’s 1st Yen Sukuk (2014) Worlds’s 1st Rated Perpetual
Subordinated Sukuk (2014) Top Lead Manager for Corporate
Sukuk (2006-2008, 2013) Award of Distinction Blueprint
Awards: World's first Islamic residential mortgage-backed securities deal (2006)
No. 1 Lead Manager Award (Islamic) by Programme Value (1990-2002, 2004, 2006-2009)
No.1 Lead Manager Award (Islamic) by Number of Issues (1990-2002, 2004, 2006-2009, 2013, 2014)
Innovation in Islamic Finance (2013)
Best Domestic Debt House in Malaysia (2015)
Best Regional Islamic Bank in Asia (2010-2013)
Best Islamic Bank in Malaysia (2010-2013)
Asia’s Islamic Deal of the Year (2011, 2013, 2015)
Most Innovative Bank for Islamic Finance (2012, 2015)
Global and Asia Pacific Islamic Bank of the Year (2013)
Islamic Finance Deal of the Year (Asia Pacific) (2011, 2014)
Islamic Finance Deal of the Year (America) (2014)
Islamic Finance Deal of the Year Europe (2014)
Highly Commended Islamic Finance Deal (2009)
Global Islamic Investment Bank of the Year (2006)
Real Estate Finance Deal of the Year in Asia Pacific (2014)
CIMB Islamic: Award-winning Islamic Finance Franchise
Thank You